Note 9 - Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2011

Fair Value Disclosures [Text Block]

9.           Fair Value of Financial Instruments

The Company carries certain financial assets and financial liabilities at fair value in accordance with ASC Topic 825, “Financial Instruments” (“ASC Topic 825”) and values those financial assets and financial liabilities in accordance with ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”).  ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  ASC Topic 825 permits entities to choose to measure many financial instruments and certain other items at fair value. At September 30, 2011, the Company carried financial assets and financial liabilities under the fair value option with fair values of $71.5 million and $27.2 million, respectively. At December 31, 2010, the Company carried financial assets and financial liabilities under the fair value option with fair values of $73.0 million and $32.2 million, respectively. The Company elected to measure at fair value securities with a cost of $10.0 million that were purchased during the nine months ended September 30, 2011. During the nine months ended September 30, 2010, the Company did not elect to carry any additional financial assets or financial liabilities under the fair value option.

The following table presents the financial assets and financial liabilities reported at fair value under the fair value option and the changes in fair value included in the Consolidated Statement of Income – Net gain from fair value adjustments, at or for the periods ended as indicated:

	Fair Value		Fair Value		Changes in Fair Values For Items Measured at Fair Value
	Measurements		Measurements		Pursuant to Election of the Fair Value Option
	at September 30,		at December 31,		Three Months Ended						Nine Months Ended
(Dollars in thousands)	2011		2010		September 30, 2011			September 30, 2010			September 30, 2011			September 30, 2010
Mortgage-backed securities	$	40,770	$	51,475	$	(159	)	$	(86	)	$	(554	)	$	1,099
Other securities		30,716		21,574		(364	)		359			(1,133	)		483
Borrowed funds		27,189		32,227		3,517			1,225			5,038			4,154
Net gain from fair value adjustments (1) (2)					$	2,994		$	1,498		$	3,351		$	5,736

       (1)   The net gain from fair value adjustments presented in the above table does not include net losses of $0.9 million and $1.5 million for the three months ended September 30, 2011 and 2010, respectively, from the change in the fair value of interest rate caps.

       (2)   The net gain from fair value adjustments presented in the above table does not include net losses of $2.1 million and $5.9 million for the nine months ended September 30, 2011 and 2010, respectively, from the change in the fair value of interest rate caps.

Included in the fair value of the financial assets and financial liabilities selected for the fair value option is the accrued interest receivable or payable for the related instrument. One pooled trust preferred security is over 90 days past due and the Company has stopped accruing interest. The Company continues to accrue on the remaining financial instruments and reports, as interest income or interest expense in the Consolidated Statement of Income, the interest receivable or payable on the financial instruments selected for the fair value option at their respective contractual rates.

The borrowed funds had a contractual principal amount of $61.9 million at September 30, 2011 and December 31, 2010.  The fair value of borrowed funds includes accrued interest payable of $0.4 million at September 30, 2011 and December 31, 2010.

The Company generally holds its earning assets, other than securities available for sale, to maturity and settles its liabilities at maturity. However, fair value estimates are made at a specific point in time and are based on relevant market information. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular instrument. Accordingly, as assumptions change, such as interest rates and prepayments, fair value estimates change and these amounts may not necessarily be realized in an immediate sale.

Disclosure of fair value does not require fair value information for items that do not meet the definition of a financial instrument or certain other financial instruments specifically excluded from its requirements. These items include core deposit intangibles and other customer relationships, premises and equipment, leases, income taxes, foreclosed properties and equity.

Further, fair value disclosure does not attempt to value future income or business. These items may be material and accordingly, the fair value information presented does not purport to represent, nor should it be construed to represent, the underlying “market” or franchise value of the Company.

Financial assets and financial liabilities reported at fair value are required to be measured based on either: (1) quoted prices in active markets for identical financial instruments (Level 1); (2) significant other observable inputs (Level 2); or (3) significant unobservable inputs (Level 3).

A description of the methods and significant assumptions utilized in estimating the fair value of the Company’s assets and liabilities that are carried at fair value on a recurring basis are as follows:

Level 1 – where quoted market prices are available in an active market. The Company did not value any of its assets or liabilities that are carried at fair value on a recurring basis as Level 1 at September 30, 2011 and December 31, 2010.

Level 2 – when quoted market prices are not available, fair value is estimated using quoted market prices for similar financial instruments and adjusted for differences between the quoted instrument and the instrument being valued.  Fair value can also be estimated by using pricing models, or discounted cash flows.  Pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices and credit spreads.  In addition to observable market information, models also incorporate maturity and cash flow assumptions. At September 30, 2011 and December 31, 2010, Level 2 includes mortgage related securities, corporate debt and interest rate caps.

Level 3 – when there is limited activity or less transparency around inputs to the valuation, financial instruments are classified as Level 3.  At September 30, 2011 and December 31, 2010, Level 3 includes trust preferred securities owned by and junior subordinated debentures issued by the Company.

The methods described above may produce fair values that may not be indicative of net realizable value or reflective of future fair values. While the Company believes its valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies, assumptions and models to determine fair value of certain financial instruments could produce different estimates of fair value at the reporting date.

The following table sets forth the assets and liabilities that are carried at fair value on a recurring basis, classified within Level 3 of the valuation hierarchy for the period indicated:

	For the nine months ended
	September 30, 2011
	Trust preferred			Junior subordinated
	securities			debentures
	(In thousands)
Beginning balance	$	10,144		$	32,226
Transfer into Level 3		-			-
Net loss from fair value adjustment
of financial assets		(1,625	)		-
Net gain  from fair value
adjustment of financial liabilities		-			(5,037	)
Change in unrealized losses included
in other comprehensive income		(3,005	)		-
Ending balance	$	5,514		$	27,189

The following table sets forth the assets and liabilities that are carried at fair value on a recurring basis and the method that was used to determine their fair value, at September 30, 2011 and December 31, 2010:

	Quoted Prices
	in Active Markets				Significant Other				Significant Other
	for Identical Assets				Observable Inputs				Unobservable Inputs				Total carried at fair value
	(Level 1)				(Level 2)				(Level 3)				on a recurring basis
	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2011		2010		2011		2010		2011		2010		2011		2010
	(in thousands)
Assets:
Mortgage-backed
Securities	$	-	$	-	$	784,524	$	754,077	$	-	$	-	$	784,524	$	754,077
Other securities		-		-		41,652		39,968		5,514		10,144		47,166		50,112
Interest rate caps		-		-		423		2,509		-		-		423		2,509
Total assets	$	-	$	-	$	826,599	$	796,554	$	5,514	$	10,144	$	832,113	$	806,698
Liabilities:
Borrowings	$	-	$	-	$	-	$	-	$	27,189	$	32,226	$	27,189	$	32,226
Total liabilities	$	-	$	-	$	-	$	-	$	27,189	$	32,226	$	27,189	$	32,226

The following table sets forth the Company’s assets that are carried at fair value on a non-recurring basis and the method that was used to determine their fair value, at September 30, 2011 and December 31, 2010:

	Quoted Prices
	in Active Markets				Significant Other				Significant Other
	for Identical Assets				Observable Inputs				Unobservable Inputs				Total carried at fair value
	(Level 1)				(Level 2)				(Level 3)				on a non-recurring basis
	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2011		2010		2011		2010		2011		2010		1022		2010
	(in thousands)
Assets:
Impaired loans			$	-			$	-	$	50,161	$	51,615	$	50,161	$	51,615
Other Real estate owned				-				-		4,250		1,588		4,250		1,588
Total assets	$	-	$	-	$	-	$	-	$	54,411	$	53,203	$	54,411	$	53,203

The Company did not have any liabilities that were carried at fair value on a non-recurring basis at September 30, 2011 and December 31, 2010.

The estimated fair value of each material class of financial instruments at September 30, 2011 and December 31, 2010 and the related methods and assumptions used to estimate fair value are as follows:

Cash and Due from Banks, Overnight Interest-Earning Deposits and Federal Funds Sold, FHLB-NY stock, Bank Owned Life Insurance, Interest and Dividends Receivable, Mortgagors’ Escrow Deposits and Other Liabilities:

The carrying amounts are a reasonable estimate of fair value.

Securities Available for Sale:

Securities available for sale are carried at fair value in the Consolidated Financial Statements. Fair value is based upon quoted market prices (Level 1 input), where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities and adjusted for differences between the quoted instrument and the instrument being valued (Level 2 input). When there is limited activity or less transparency around inputs to the valuation, securities are classified as (Level 3 input).

Loans:

The estimated fair value of loans, with carrying amounts of $3,229.1 million and $3,276.3 million at September 30, 2011 and December 31, 2010, respectively, was $3,375.1 million and $3,359.8 million at September 30, 2011 and December 31, 2010, respectively.

Fair value is estimated by discounting the expected future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities (Level 2 input).

For non-accruing loans, fair value is generally estimated by discounting management’s estimate of future cash flows with a discount rate commensurate with the risk associated with such assets (Level 2 input).

Due to Depositors:

The estimated fair value of due to depositors, with carrying amounts of $3,116.8 million and $3,163.3 million at September 30, 2011 and December 31, 2010, respectively, was $3,173.4 million and $3,212.6 million at September 30, 2011 and December 31, 2010, respectively.

The fair values of demand, passbook savings, NOW and money market deposits are, by definition, equal to the amount payable on demand at the reporting dates (i.e. their carrying value). The fair value of fixed-maturity certificates of deposits are estimated by discounting the expected future cash flows using the rates currently offered for deposits of similar remaining maturities (Level 2 input).

Borrowings:

The estimated fair value of borrowings, with carrying amounts of $698.7 million and $708.7 million at September 30, 2011 and December 31, 2010, respectively, was $743.8 million and $736.4 million at September 30, 2011 and December 31, 2010, respectively.

The fair value of borrowings is estimated by discounting the contractual cash flows using interest rates in effect for borrowings with similar maturities and collateral requirements (Level 2 input) or using a market-standard model (Level 3 input).

Interest Rate Caps:

The estimated fair value of interest rate caps at September 30, 2011 and December 31, 2010 was $0.4 million and $2.5 million, respectively. The Company has not designated the interest rate cap agreements as hedges as defined under the Derivatives and Hedging Topic of the Financial Accounting Standards Board (“FASB”) ASC. Interest rate caps are carried at fair value in the Consolidated Financial Statements in “Other assets” and changes in their fair value are recorded through earnings in the Consolidated Statements of Income - Net gain (loss) from fair value adjustments.  The Company purchased interest rate caps during 2009 with a notional amount of $100.0 million. The Company uses interest rate caps to manage its exposure to rising interest rates on its financial liabilities without stated maturities. Fair value for interest rate caps is based upon broker quotes (Level 2 input).  The Company recorded net losses of $0.9 million and $1.5 million for the three months ended September 30, 2011 and 2010, respectively, from the change in the fair value of interest rate caps and net losses of $2.1 million and $5.9 million for the nine months ended September 30, 2011 and 2010, respectively, from the change in the fair value of interest rate caps.

Other Real Estate Owned:

OREO are carried at fair value less selling costs.  The fair value is based on appraised value through a current appraisal, or sometimes through an internal review, additionally adjusted by the estimated costs to sell the property (Level 3 input).

Other Financial Instruments:

The fair values of commitments to sell, lend or borrow are estimated using the fees currently charged or paid to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties or on the estimated cost to terminate them or otherwise settle with the counterparties at the reporting date. For fixed-rate loan commitments to sell, lend or borrow, fair values also consider the difference between current levels of interest rates and committed rates (where applicable).

At September 30, 2011 and December 31, 2010, the fair values of the above financial instruments approximate the recorded amounts of the related fees and were not considered to be material.